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In the midst of covid, insurance regulation remains profitable



The Covid-19 pandemic hit state budgets particularly hard in 2020, with a $ 24.11 billion reduction in tax revenue from 2019 levels. But analysis of data from the National Association of Insurance Commissioners (NAIC) shows that insurance regulation remained a lucrative source of revenue for the states, generating $ 3.29 billion in budget surpluses in the 50 states and the District of Columbia, up from $ 2.94 billion in 2019. [19659002]] According to data from the Federation of Tax Administrators, the state's total tax collection fell 2.2% from $ 1,090 trillion in 2019 to $ 1,066 trillion in 2020, with Utah (down 12.4%), North Dakota (down 12.8%) and Alaska (down 12.8%). 26.0%) was hit hardest of all. In total, 31

states and the District of Columbia saw tax revenues fall, with California alone down a steep $ 16.27 billion. estimates, an increase of 12.9% from $ 3.34 billion in 2019. Together with the $ 190.6 million in fines and penalties collected by the departments (roughly unchanged from 2019) and $ 1.07 billion in miscellaneous "other" revenue , state insurance departments generated $ 5.03 billion of total revenue, more than three times the $ 1.60 billion they actually spent on insurance settlement.

This $ 3.43 billion in "legislative surplus" (up 11.8% from $ 3.07 billion in 2019) must be weighed against the $ 140.8 million in funds that insurance departments deducted from their states' public funds, in itself an increase of 5.4% compared to 2019. But even after subtracting that amount, the insurance scheme remained a profit center for states, with $ 3.29 billion in surplus revenue, an increase of 12.1% from $ 2.94 billion in 2019.

A Tax by Any Other Name [19659011]

Revenue collected by insurance departments and fees – whether they are fees, charges and fees penalties or funds from other sources – should not be confused with the taxes that states levy on insurance premiums. All states collect taxes on the premiums written within that state and most also collect "retribution taxes" and charge insurers outside the state the tax rate set by their state of residence if it is higher than the tax rate in the jurisdiction where the premium is written. The existence of retaliatory taxes forces most insurance companies to live in relatively low-tax jurisdictions. The states with the highest and lowest effective premium tax rate in 2020 are shown in the chart above.

Premium and retaliatory taxes are deposited in a state's general fund, just like other sales taxes. Kansas is a partial exception in this regard, as the Kansas Insurance Department retains 1% of the collected premium taxes, which they report as "other" income. As shown in the chart below, premium taxes have been a stable and largely recession-proof source of revenue for the states, increasing by 61.7% over the past decade from $ 14.82 billion in 2011 to $ 23.97 billion in 2020.

[0265] ] But as mentioned, the fees and fines collected by insurance departments significantly exceed the amounts that are absolutely needed to support supervisory activities. In 2020, only seven state insurance departments (North Carolina, Arizona, Maryland, Hawaii, Minnesota, Michigan, and Tennessee) collected less revenue than the combination of what they spent on regulation and what they received from the state general fund. In fact, the total amount spent by states on insurance regulation in 2020 ($ 1.36 billion) represented only 31.8% of the revenues collected by the insurance regulators.

The rest of the funds – the so-called "regulatory surplus" – amount to a hidden tax on insurance companies, which is ultimately passed on to consumers in the form of more expensive coverage.

Following the Money

State insurance departments differ in how their budgets are structured and what happens to the funds collected by regulators. . A small majority of states (27 in total) use "dedicated" budgets, where the revenue goes into a separate account that is transferred from year to year. If the revenue flowing into the account exceeds the budget allocated by the state legislature for that year, the surplus is carried over to future years and can be used to cover future departmental deficits.

In theory, the advantage is a dedicated financing system. to reduce cyclical fluctuations in revenue. For example, a department can collect large fines and penalties that act as a one-time loss. For example, Texas reported that $ 19.2 million of the $ 67.6 million in fines and penalties collected by the state in 2020 were from a single entity, while Vermont noted that a large settlement accounted for $ 1.8 million of the two. $ 2 million in fines reported.

A dedicated funding budget should also theoretically mitigate any need for a department to either cut spending or use public funds from a state treasury. But as the table below illustrates, there are some differences between the theoretical presentation and how departments with dedicated budgets perform in the real world.

As is obvious, the vast majority of dedicated budgets — 24 27 – have increased more in revenue than they have spent on insurance regulation during each of the last five years. Two other states, Hawaii and Michigan, have registered deficiencies in each of the last five years. Only Maine and Maryland actually performed as the theoretical accounts would predict, with deficits in some years and surpluses in others.

In addition, in some cases, the surpluses are really huge. The cumulative five-year surplus of $ 2.81 billion generated by New York, or the five-year surplus of $ 1.09 billion generated by Texas, cannot reasonably be characterized as a prudent "rainy day fund." Both states apparently charge insurers and insurance producers for statutory and licensing fees in a huge amount. for the past five years, despite the fact that all four posted surpluses each year. Two of those departments have received only very limited public funds, with none in 2020. (Oklahoma received $ 1.6 million in public funds in 2016, but none in the last four years. Washington State received a total of about $ 500,000 in 2016 and 2017, but none in the last three years.)

California, which often draws a small portion of its annual budget from the Treasury, has taken $ 21.6 million in public funds over the past five years. The real deviant is North Carolina. Although the department has accumulated a total of $ 35.4 million in surplus over the past five years, the ministry also withdrew as much as $ 209.8 million in public funds from the state during the same period.

Only 11 states withdrew any public funds from their treasuries by 2020 , but they came from all four types of budgets identified by the NAIC: dedicated (as covered above), quasi-dedicated (surplus revenue is deposited annually in the general government account), general (all operating funds are allocated directly by the state) and "combination" (the department's budget rules use a combination of two or more of the other types).

While Mississippi and South Dakota are the only states that deduct 100% of their funding from the General Fund, only Mississippi is formally categorized as a "general funding" state, a change took effect in 2017. Notably, while the Mississippi continues to collect regulatory fees and assessments from companies, starting in 2020 , it no longer reports such funds, all of which are deposited in the state's general account.

Mississippi's failure to report the statutory fees and assessments it collects despite, for the 23 states (and the District of Columbia) that do not use dedicated budgets Generated budget surpluses through insurance regulation earn even more directly as a tax. Excess funds are usually, but not always, put into the treasury. There are some partial exceptions. Arkansas allows the department to transfer surplus funds for one year, but transfers any surpluses to the general fund every two years. Alaska and North Dakota both allow their departments to transfer over $ 1 million to the following year, with the remainder transferred to the General Fund.

Among states without dedicated funds, only Arizona and Tennessee spent more on insurance regulation than they generated in 2020 revenue. Together, this cohort of jurisdictions raised $ 2.87 billion in revenue. After deducting the $ 454.4 million they spent on regulation and the $ 83.5 million they withdrew from public funds, these states received a cumulative $ 2.33 billion from insurance regulation in 2020.

Conclusion

Below I list the states in surplus order. from insurance regulation (net income after both the department's operating costs and any public funds transferred from the central government treasury) expressed as a percentage of that central government department's budget.

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covid-19
Legislation
Victory defeat


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